The deal between the US and China to reduce tariffs significantly for a 90-day period means a welcome reduction of international trade tensions. Combined with the recent deal with the UK and ongoing talks with the EU, it has sparked a surge in share prices, with investors hoping that their worst fears on tariffs may not now come to pass. In reality, however, it is far too soon to sound the all clear.
The trade war between the US and China had spiralled to such an extent that it was posing an imminent threat to the availability of some products on the US market – and also to the Chinese companies supplying these goods. International supply chains were being disrupted.
This meant that it was in the interest of both sides to slash the tariffs of well over 100 per cent which effectively made trade impossible in many key areas. The US faced the risk of some empty supermarket shelves and jobs in China would have been under threat. In the interconnected world of trade, effecting change is complicated, risky and slow, contrary to the “quick wins” sought by the Trump administration.
And the recent developments needs to be put in context. The tense political relationship between the US and China means it is far from certain that a permanent deal can be reached in 90 days. The US will push for Chinese commitments to buy more US products in certain areas – and this may reduce the trade deficit a bit – but a significant reduction will not happen in the short term, barring a destructive reimposition of very high tariffs.
Even as things stand, tariffs on trade between the two are significantly higher than when Trump came to power. If these remain, there will be an economic cost.
Looking at the wider picture, it is a fair bet that more ups and downs lie ahead as Trump’s chaotic approach to trade continues. Apart from the uncertainty with China, negotiations with the EU will be difficult, particularly as Brussels will surely seek a removal of all the tariffs announced by the US president on so-called “ Liberation Day” last month, unlike what is happening in the deal done with the UK. As all this plays out, the uncertainty itself will have a cost, as companies hold off from new investment to see how things pan out.
So far, the economic cost to Ireland comes from this uncertainty and from the 10 per cent tariffs which remain in place on imports into the US from many sectors. But wider threats remain. The demands from the Trump administration for a cut in drug prices could knock on to lower corporate profits in major pharma multinationals and a fall in Irish tax revenues. Wider threats from trade tensions between the EU and US remain.
This all calls for caution in managing the public finances and real progress in addressing barriers to competitiveness – two areas in which the Government has, to put it kindly, still to prove itself.
